INCORPORATION OF COMPANIES
The Companies Act provides, by section 14(1) thereof, that two or
more persons associated for any lawful purpose may form an incorporated company
by subscribing their names to a memorandum and complying with the requirements
as to registration.
Section 14(3) of the Act goes
on to prohibit the formation of an association or partnership which has for its
object the acquisition of gain, unless:
it is a professional association or partnership which
is declared by the Minister as one not customarily carried on by an association
or partnership incorporated under the Act;
in the case of any other association or partnership,
it consists of not more than twenty members;
it is incorporated under the Act; or
it is formed in pursuance of some other written law or
letters patent.
An association of more than twenty persons and not registered under the
Companies Act and not within the exceptions of (a) or (d) of section 14(3) is
an illegal association. However that does not prevent the court granting
certain reliefs such as an account:
SOH
AH SUAN v ANG HUAY CHWEE [1937] MLJ 109.
In this case, The Keppel Bus company was an association of more than
twenty bus-owners carrying on business having for its object the acquisition of
gain within the meaning of s.4 (2) of the previous companies legislation, The
Companies Ordinance (Cap 151). The association was not registered under that
Ordinance and was therefore an illegal association. The defendants were the
manager and treasurer respectively of the association. A member, on behalf of
himself and other members except the defendants, claimed an account of all
moneys received by the defendant and other relief.
In granting the order, the court held that notwithstanding that the
association was illegal under the Companies Ordinance, the Court was not
debarred from affording relief to the plaintiff on behalf himself and all other
members except the defendants by granting the account.
Procedural Requirements for Incorporation
Basic procedures:
1. Obtaining approval for the proposed company name
2. Lodging with the Registrar of Companies certain documents:
- The Memorandum and Articles of Association
- Statutory declarations by promoters and directors
(Form 48A)
- Particulars of directors and registered office
(Form 44, 45 and 49)
- Declaration of compliance (Form 6)
- A statement of allotment of shares to the
subscribers to the memorandum (Form 24)
3. Payment of registration fees
Memorandum and Articles
By section 16(1) of the Act, persons desiring to incorporate a
company are required to lodge the memorandum and articles (if any) of the
proposed company with the Registrar together with all other necessary
documents. The Registrar is then obliged, upon payment of the requisite fee and
being satisfied that the requirements of the Act have been complied with, register
the memorandum and articles, if any.
The memorandum (or articles, if any) must also contain the names of at
least two persons who are to be the first directors of the proposed company,
otherwise, the Registrar is obliged not to register the documents: section
16(7). Likewise, the Registrar is obliged to refuse registration if the
proposed company is likely to be used for unlawful purposes or any purposes
prejudicial to peace, welfare, security, public order or morality in Malaysia
or prejudicial to notional security or public interest: section 16(8).
Statutory
Declarations
The person named in the articles as the first secretary of the company
must make and lodge with the Registrar a statutory declaration in the
prescribed form stating that all necessary requirements of the Act have been
complied with and containing the prescribed information, and the Registrar may
accept this declaration as sufficient evidence of compliance: section 16(2).
Every promoter of a proposed company who is a natural person is also
required to make and lodge with the Registrar and the Official Receiver, a
statutory declaration in the prescribed form that he will not be acting in
contravention of sections 125 and 130 of the Act: section 16(3A). Section
125 declares that anyone who, being an undischarged bankrupt, acts as a
director of or directly or indirectly takes part in or is concerned in the
management of any corporation without leave of court, commits an offence, while
section 130 prohibits a person convicted of an offence in connection the
promotion, formation or management of a corporation or fraud or dishonesty or
offences under sections 132 (duty and liability of officers), 132A
(dealings by officers in securities) and 303 (liability for not keeping
proper accounts), from acting as aforesaid for a period of five years from the
date of conviction or release from prison.
Name of
Proposed Company
Except with the consent of the Minister, a company is not to be
registered by a name that, in the opinion of the Registrar, is undesirable or
is a name that the Minister has directed the Registrar not to accept for
registration: section 22(1) of the Act.
A limited company must have “Berhad” or the abbreviation “Bhd”
at the end of its name: section 22(3), while a private company must have
the word ”Sendirian” or the abbreviation “Sdn” inserted
immediately before the word “Berhad” or before the abbreviation “Bhd”
or in the case of an unlimited company, at the end of its name: section
22(4). Section 22(5) goes on to state that it is lawful to use the
abbreviation ‘Bhd’ and ‘Sdn’ instead of the words ‘Berhad’
and ‘Sendirian’ respectively.
Under section 22(6) of the Act, the applicant for registration of
an intended company must apply to the Registrar in the prescribed form for a search
as to the availability of the proposed name and for reservation of the same, if
available. If the Registrar is satisfied as to the bona fides of the
application and that the proposed name could be used without contravention of section
22(1) (prohibition of ‘undesirable’ names), he will reserve the name for a
period of three months from date of lodging of the application: section
22(7). During the period of reservation, no other company may be registered
under the reserved name or any other name which, in the opinion of the
Registrar, so closely resembles the reserved name: section 22(9).
However, the reservation of a name under section 22 in respect of an
intended company does not in itself entitle the intended company to be
registered by that name: section 22(10).
ANGKASA JURUTERA PERUNDING SDN BHD v PENDAFTAR SYARIKAT
(KETUA PEGAWAI EKSEKUTIF, SURUHANJAYA SYARIKAT MALAYSIA) & ANOR [2004]
5 MLJ 421 (HC).
In this case, the primary issue was whether the trade name ‘Angkasa
Consulting Services Sdn Bhd’ was so similar to ‘Angkasa Jurutera Perunding’
that it was undesirable within the meaning of section 22 of the Companies Act
1965.
The court held that these names were in no way identical or closely
similar, and read as a whole, clearly denoted two different companies and that
the word ‘Angkasa’ was not descriptive of any business and as such, no one
ought to have monopoly over the usage of that particular word as a trade name.
Even when the plaintiff’s name was translated into the English language the
word ‘Service’ in the second defendant’s name was a material distinction from
the word ‘Engineers’ in the plaintiff’s name.
MAXIS SDN BHD v SURUHANJAYA SYARIKAT MALAYSIA & ORS [2004] 2 MLJ 84
Maxis Sdn Bhd sought a declaration against the Registrar of the
Companies in approving the use of the name of the name ‘Maxis’ by the second to
tenth defendants. The second to seventh defendants (the applicants) however
counterclaimed against the plaintiff and four others (the respondents) for
passing off and applied for an interim injunction to prohibits the respondents
from using the name ‘Maxis’, passing off its business as that of the
applicants, conducting any form of business using the name ‘Maxis’ or any name
consisting of the name ‘Maxis’ and advertising in any form whatsoever using the
word ‘Maxis’.
The court held, allowing the application in part and granting the
interim injunction as follows:
a. The original legal concept of passing off was confined
to traders competing in the same line of business or goods. However, this cause
of action had been extended to protect and preserve the goodwill of
businessman. It was not restricted to cases where the parties were engaged in a
common field of business activity but also extended to any business that might
mislead persons into thinking that those products or services were the goods
and services of another
b. The applicants had through constant and persistent
advertisement promoted the word MAXIS to be a name associated and belonging to
the applicants in Malaysia. Though the name mainly connected with the business
of telecommunications, nevertheless other lines of product and services bearing
such name could be considered by the public as that of the applicant.
c. The actions of the respondents clearly raised
suspicions that they were out to deceive, confused and mislead the public into
believing that the goods and services they offered were those applicants (MAXIS
Group of Companies). When actions were carried out with intention to defraud,
as evidenced from the actions of the respondents in the case, the court should
be more vigilant and will move in to prevent it; and
d. From the facts disclosed in the affidavits of the
parties, there was a likelihood of damage to the applicants if the respondents
were not restrained in this action.
Certificate of Incorporation
Upon registration of the memorandum the Registrar certifies under his
hand and seal that the company is incorporated on and from the date specified
in the certificate and that company is either a company limited by shares, a
company limited by guarantee, a company limited both by shares and guarantee or
an unlimited company, as the case may be, and also that it is a private
company, if that be the case: section 16(4).
Conclusiveness
of Certificate of Incorporation
Once the certificate of incorporation is issued, it is conclusive
evidence that all the requirements of the Act in respect of registration and of
matters precedent and incidental thereto have been complied with, and that he
company referred to therein is duly incorporated under the Act: section 361.
TAN LAI v MOHAMED BIN MAHMUD & ORS [1982] 1 MLJ 338
In this case, a sawmill licence had been granted to the first defendant
and another to operate a sawmill. The licence was not transferable. A company
was formed to work the sawmill licence, with a $200,000.00 capital, of which
75% was held by the plaintiff and the remaining 25% by the first defendant and
the other licence. Subsequently the plaintiff sold his shares in the company to
the first defendant. The plaintiff accepted delayed payment but obtained a
guarantee from the other three defendants. The first defendant refused to pay
the outstanding balance of $43,000.00. the plaintiff sued the defendants for
the amount due. The defendants claimed that the sale of the shares and the
guarantee agreement were illegal.
The court entered judgment for the plaintiff, holding that although the
agreements were illegal as an attempt at circumventing the condition of
non-transferability of the licence, the sale of the shares was not tainted.
Further, while the operation of the sawmill by the company was illegal as it
had no sawmill licence, the incorporation of the company itself was lawful.
INCORPORATION OF A COMPANY
The term ‘incorporation’ refers to the act of registering a company.
Registration is done at CCM, which is the relevant body supervising registered
companies and enforcing CA 1965.
When a company is registered, it said to have been incorporated.
However, the meaning of incorporation is not limited to the context of company
registration. The term ‘incorporation’ has legal implications with regard to
the operations of the company and those who are dealing with the company.
A company comes into existence on the date it is incorporated, ie the
date it is registered. On that date, it becomes an ‘incorporated association’
because it is an association of persons formed usually for the purposes of
doing business.3
On the date of its incorporation, the company will have its own
existence and identity that is separate from its members, officers,4
employees and those who form the company.
In Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor (1996),
the court noted that in the eyes of the law, a company is considered as a legal
person, ie it is a persona at law. Therefore, the company is a legal
entity by itself. The company will have its own rights and duties.
A company is not a natural person; it only an artificial or juristic
person. This is because although it has the powers of a natural person, it does
not have the full capacity of a natural person. As declared by Sumner LJ in Gas
Lighting Improvement Co Ltd v IRC (1923), a company’s artificial
personality is real. Essentially, a company is composed of natural person.
SEPARATE LEGAL PERSONALITY
The separate legal personality of a company means that it has a
different legal existence from the shareholders, officers, employees and others
who form the company.
This concept does not apply to other forms of businesses such as sole
trader or partnership, eg in the context of a sole trader, he and the business
are not considered as separate from each other. They are considered as one and
the same. Similarly, partners of a partnership firm are not separate from the
firm.
The concept of separate legal personality was laid down in Salomon v
A Salomon & Co Ltd
SALOMON v A SALOMON & CO LTD [1897]
AC 22
Facts:
Aron Salomon was a sole trader manufacturing boots and shoes. As a sole
trader, he was running and managing the business himself. Thus, any profits
made belonged to him. His family wanted a share in the business and so he
decide to form a company named ‘A Salomon Co Ltd’. Salomon owned 20,001 of the
company’s 20,007 shares – his wife, four sons and daughter took up one each of
the remaining six shares. He sold the business to the company for £38,782. The
company paid Salomon by issuing 20,000 shares at a nominal value of £1 each.
The company then issued a debenture for £10,000. The balance of £8,782 was paid
in cash. At the time, the governing law was Companies Act 1862, which
required a minimum of seven members to form a company. Salomon, his wife, and
his five children became the members of the company. He and his two eldest sons
became the directors of the company. Some months later the business began to
slow down. Salomon lent some money to the company but this did not help improve
matters. The company then decided to borrow money from some creditors. The
situation still did not improve. Finally, the company had to be wound up. The
liabilities of the company exceeded the assets by an amount of £7,733. The
issue that arose was whether the creditors should be repaid first or Salomon.
The creditors argued that the company and Salomon are considered as one and
therefore, he could not bring an action against himself. This would also mean
that he should not be repaid. In fact, he should repay the creditors if the
company is unable to pay the creditors.
Held:
The only requirement under Companies Act 1862
was to have at least seven members in a company, which was satisfied by A Salomon
Co Ltd. It does not matter whether one of the members owned a huge number of
shares or there is a close relationship among the members.
The moment a company is registered, it has an identity
of its own, separate from its members and officers. Although after
incorporation it seemed as if the same persons were managing and running the
business, this is irrelevant in law.
Therefore, since Salomon is separate from the company,
he is not liable for the debts of the company.
The principle laid down in Salomon has been applied in Malaysia
in Abdul Aziz b Atan & 87 Ors v Ladang Rengo Malay Estate Sdn Bhd (1985),
illustrating that the principle has been accepted by the courts in Malaysia.
ABDUL AZIZ B ATAN & 87 ORS v LADANG RENGO MALAY ESTATE
SDN BHD [1985]
2 MLJ 165
Facts:
All
the shareholders of the respondent company by a written agreement sold and
transferred their entire shares to a certain buyer in 1981. The main asset of
the company consisted of land on which the company appeared to have carried on
the business of a rubber and palm oil estate. In November 1982, a claim was
initiated for termination benefits under Regulations 8 of the Employment
(Termination and Lay-Off Benefits) Regulations 1980. The point in dispute was
whether the sale of shares meant that the estate was sold and if so whether
a change of employer took place.
Held:
An incorporated company is a legal person separate from the shareholders
of the company. The shares belong to the company which does not include the
estate. There was no change in the company’s identity or personality. The
estate belongs to the company. Thus, the claim failed.
The Salomon principle was also applied in New Zealand in Lee v
Lee’s Air Farming Ltd (1961).
LEE v LEE’S AIR FARMING LTD [1961] AC 12
Facts:
Lee formed a company where he held 2999 shares of the company’s 3000
shares. Lee was the only governing director of the company and he hired himself
as an employee in the company, ie as the main pilot in the company. His work
was to spray fertiliser from the air. One day, the plane he was flying crashed
and he died as a result. His wife attempted to claim compensation on behalf of
her deceased husband. The compensation board refused because it considered that
Lee and the company were one and the same. This was because he formed the
company and as a director, he employed himself as an employee. The main
question in the case was whether a person could be both a director and major
shareholder of a corporation on the one hand, and also an employee of the
corporation, on the other.
Held:
The fact that Lee was the governing director does not prevent him from
entering into an employment contract with the company. Applying the principle
in Salomon, the company and Lee are separate. The contract of employment, which
employed Lee, is valid. Lee is an employee. Therefore his wife is entitled to
claim the compensation on behalf of the deceased husband.
Consequences of Incorporation
Although the concept of separate legal personality is not expressly
provided in CA 1965, it may be implied from s 16(5), which states
that the consequences of incorporation are that the company:
is capable forthwith of performing all the functions
of an incorporated company
it has all the functions of an incorporated company
it can sue or be sued in its own name
it has perpetual succession
it shall have a common seal
it has power to own land, and
it has members’ liability as provided by the Act.
Able to Sue or Be Sued
Since a company has its own existence and identity, a company can sue or
be sued in its own name. This rule is laid down in FOSS v HARBOTTLE (1843)
67 ER 189 which states that an action is to be brought in the name of company
and not that of the shareholders or directors. In this case, two shareholders in a company brought an
action against the company’s directors. They alleged that the property of the
company had been misused. The court held
that the injury complained was an injury to the company. In law, the company
and its members were not same. Therefore, the members cannot maintain such
suit. It was for the company to sue and not the members. In other words, the
company is the proper plaintiff to initiate actions in respect of wrongs done
to it.
Hence, the company can enforce its own rights and at the same time,
incur liabilities. For example, in Salomon, Salomon brought an action
against the name of the company knowing very well that the company is named
after him, ie A Salomon. Hence, Aron Salomon and the company are separate
entities. This then would mean that members, employees and officers of the
company can bring an action against the company if they feel that a wrong has
been done against them. Similarly, the company can bring an action against its
members, employees and officers.
A company cannot sue or be sued as such before incorporation.
AFAD SHA SDN BHD v SPPIK DAGANG SDN BHD & ANOR [1997] 4 MLJ 90
The court held that execution proceedings pursuant to a judgment which
was a nullity could not be proceeded with. In this case the nullity arose
because the plaintiff had filed the suit before its incorporation under the Act
and as the plaintiff was not-existent the court held it had no right to sue.
Perpetual Succession
Perpetual succession is the continuing existence of a company until it
is legally wound up or it is struck off by the ROC for non-compliance of CA
1965 or for illegality.
The company is unaffected by the death, bankruptcy, insanity or
departure of any member but continues its existence no matter what and how many
changes in membership occur.
In RE NOEL TEDMAN HOLDINGS PTY LTD (1967), a husband and wife
were the only two directors and also the only two members of the company. They
were both killed in an accident. The court held that the company is not
affected by the incident and would continue to exist.
Power to Own Land
Rights, liabilities, assets and properties belong to the company and not
to the officers, members or the persons who form the company.
MACAURA v NORTHERN ASSURANCE CO LTD & ORS [1925] All
ER 51
Facts: Macaura owned
a timber business. He insured the business in his own name. Later, he formed a
company to buy the business. He was the only shareholder and a substantial
creditor of the company. One day, fire destroyed the timber. Macaura attempted
to claim compensation.
Held: The company
that he formed is separate from Macaura. He has no insurable interest in the
timber. The timber thus belonged to the company and not to Macaura. He cannot
claim for compensation. Rights, liabilities, assets and properties belong to
the company. Macaura’s relationship is with the company and not the timber.
Limited Liability
In a limited company, the liability of a member is limited. If it is a
company limited by shares, the member is only liable to the amount unpaid on
the shares: s 214(1)(d), CA 1965. For instance, if the value of one share is
RM1 and the person has bought 10 shares, his liability is RM10 since that is
the amount unpaid on the shares. Thus, the liability will depend on the number
of shares bought and the value of the shares.
Considering the Salomon case, Salomon is only liable to pay for
the 20,001 shares whereby the nominal value is £1. With regard to a company
limited by guarantee, the member is liable to the amount of undertaking in the
M/A: s 214(1)(e), CA 1965. This amount will be clearly stated in the
M/A.
A member is not liable for the debts of the company. The debts of the
company belong to the company. If the company does not have sufficient funds to
pay off its creditors, the creditors cannot bring an action against the
members. Again, considering the Salomon case, Salomon is not liable to
pay the creditors where the liabilities of the company exceeded the assets by
an amount of £7,733. In the event the company is unable to pay, then it will be
a case of the company being insolvent.
The directors
and officers of the company also are not responsible for its debts –
RE
APPLICATION OF YEE YUT EE [1978] 2
MLJ 142
Yee was the secretary of Trans-Market
Research Pte Ltd (“the company”). The company was a wholly-owned subsidiary of
an American corporation. The company retrenched staff. A dispute arose as to
retrenchment benefits. This dispute was referred to the Industrial Arbitration
Court. The company was not represented at the hearing although duly served. An
award was made in the company’s absence. Shortly after this, the company’s
managing director left Singapore. As there was no other resident director, Yee
was appointed director to comply with what is now s. 145(2) of the Companies
Act. The company did not comply with the award. The Industrial Arbitration
Court thereupon made an order that Yee be personally liable to pay the
retrenchment benefits.
The High Court quashed the order of
the Industrial Court. Choor Singh J held that the order of the Industrial
Arbitration Court was clearly erroneous in law. Except in cases of fraud,
breach of warranty of authority or other exceptional circumstances, a director
is not liable for the debts of an incorporated company.
INCORPORATION OF COMPANIES
Reviewed by Kamaruddin Mahmood
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